A court or miscellaneous bond sometimes has an open penalty, which simply means a bond penalty does not have a finite limit. Open penalty bonds carry many risks and hazards because the surety does not know the exact amount of liability it must guarantee. A typical bond has a fixed bond penalty, which means the surety limits its liability to an exact amount. However, specific obligations sometimes require an open bond penalty because the value of the guarantee may fluctuate.

Common types of open penalty bonds include appeals, supersedeas, and lost instrument bonds.

Many Federal court supersedeas bonds have open penalties despite typically having a bond amount equal to 111% of the judgment. The extra 11% of the bond amount intends to cover the post judgment interest and costs typical of long term litigation. Post judgment interest accrues yearly but the rate varies between state jurisdictions and Federal court. For example, New York State has a post judgment interest rate of 9% per year while New Jersey only has a 0.5% post judgment interest rate.

Thus, long term and complicated litigation can yield a final judgment greater than the bond amount due to accrued post judgment interest and costs. A surety bond underwriter must carefully evaluate the appellant’s financial ability to pay the judgment plus any additional interest and costs. The underwriter should try not to evaluate the merits of the appellant’s case because underwriters typically do not have law degrees and cannot predict the results of litigation. However, an underwriter should consider the character of the appellant as well as the appellant’s previous litigation history to see if they have many lawsuits and judgments against them.

A lost instrument bond commonly has an open penalty as well. These bonds protect the issuer of stock, tickets, checks, money orders, or currency when the owner misplaces the original document. The bond indemnifies the issuer for faithful honoring and issuing of a replacement document.

Lost instrument bonds involving stocks and securities have open penalties because the value of those documents fluctuate. The bond penalty equals the market value of the replacement document if the original document reappears for transactions.